Key Writings: Bell on the Gold Standard

The nomination of Janet Yellen to chair the Federal ­Reserve has come down to this: a referendum on quantitative easing and zero interest rates. The money-printing program that Ben Bernanke started five years ago this month remains Yellen’s answer for how the economy will get back on solid ground. Yet in her appearance at Thursday’s Senate Banking hearing, a bipartisan group of senators expressed dismay that Fed money printing has widened the wealth gap while fueling potential asset bubbles.

Whatever air was left in the tank of quantitative easing was let out early last week when former Fed official Andrew Huszar, the director of its $1.25 trillion mortgage-backed security purchase program, wrote a devastating Wall Street Journal op-ed, “Confessions of a Quantitative Easer,” in which he declared the program “the greatest backdoor Wall Street bailout of all time.” Huszar disclosed that he and other Fed managers expressed their concerns about this outcome early on, but they were ignored as the Federal Open Market Committee moved from a macroeconomic to a more special interest rationale. “Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers,” he wrote.

Bill Clinton, who rode a recession into office and left the scene just before another one began, knows something about the blame game. Addressing the Democratic convention on Wednesday night, he made a full-throated effort to defend the Obama presidency by putting it in the context of past Republican failure.

“They want to go back to the same old policies that got us into trouble in the first place,” he warned, listing tax cuts, financial deregulation, defense spending, and domestic budget cuts as examples. Clinton’s argument was an inch deep, but it recalled the fact that the economic catastrophe that primed Obama’s 2008 victory and has dogged his incumbency remains a liability to Republicans four years later.

If Clinton and his party believe that tax cuts can cause a financial crisis, that’s a new line of attack. If they believe that financial deregulation did it, they have never made a comprehensive case for exactly how. If it was too much spending on defense rather than entitlements, then they should review the boom of the 1980s. The Democrats have never really made a coherent argument of how the GOP caused such misery—they only pointed the finger. Meanwhile, Republicans act as if life began in January 2009.

There remains one explanation that has escaped both sides’ scrutiny because they share culpability for it. Beginning in 2001, easy money from the Federal Reserve flooded the markets with cheap credit, creating asset bubbles and finally tipping the American financial system on its side. This was a period of legitimate economic success (52 consecutive months of job growth under President George W. Bush) mixed with fake wealth attached to real estate and financial assets. No Republican is eager to wade into that story, while no Democrat wants to admit that their current strategy is reminiscent of it: Lean on the Fed to juice the economy.

Reliance on a loose-money Fed did not end well for the presidents who attempted it (Nixon, Carter, both Bushes), while Reagan and Clinton, by contrast, saw the fruits of a strong dollar. But even those relatively successful monetary policy records showed signs of dysfunction beneath the surface. Reagan was fortunate the rest of the world was eager to finance the deficit spending he failed to curb. For Clinton, the tech bubble collapse snowballed into a recession, but only on his way out the door.

The tales emerging from the Occupy Wall Street movement have a certain quaintness, as a mixture of aging anarchists and baffled Main Streeters offer dazzlingly offbeat solutions to genuine concerns.

Take the OWS protester spotted in downtown Washington, D.C., the other day who refused to answer an interviewer’s questions until the reporter plucked a stone from the pouch he was wearing. As the Wall Street Journal’s James Taranto describes it, the stone-bearer, a young man named Kyle Szlosek, proceeded to intone, “That stone is the only thing that matters in life.” If he could change anything through his protest, he said, it would be to “get rid of money.”

Other OWS protesters are more pragmatic or, at least, more formulaic. “One citizen, one dollar, one vote,” is their battle cry. This one emanates from the belief that money has corrupted U.S. elections, sabotaging the democratic process and elevating corporate greed at the expense of working Americans. The OWS protesters who raise this slogan are focused on campaign finance reform and the 2010 Citizens United Supreme Court ruling that struck down federal limits on corporate political activity.

As fuzzily focused as these complaints are (the U.S. economic meltdown in late 2008 occurred 18 months before Citizens United and a full year after the first Obama stimulus had funneled hundreds of billions of dollars to favored interests and industries), they are on to something fundamental. Our nation’s money can no longer be trusted as a storehouse of value, and big government and big business have derived perverse benefit from their ability to access and manipulate that storehouse.

The good news is that Americans are increasingly recognizing this fact and its significance. And the contenders for the highest office in the land are responding to this recognition. In politics, as in markets, the supply will respond to the demand.

Three Republican presidential candidates—Herman Cain, Ron Paul, and Newt Gingrich—have at least hinted about the desirability of a return to the gold standard. The four top Republican congressional leaders recently called on the Federal Reserve to curb its interventions in the U.S. economy. In early October the Heritage Foundation held a two-day sound money conference in which both keynote speakers—New York investment banker Lewis Lehrman and former presidential candidate Steve Forbes—called for adoption of a gold-backed dollar. Advocating the replacement of Fed chairman Ben Bernanke has become a staple of virtually all the presidential candidates. (Even establishmentarian Mitt Romney has joined in, apparently rendering inoperative his April defense of Bernanke.)

So Republican elites are rapidly climbing the learning curve on monetary policy, certainly in comparison to the days when presidential candidate John McCain joked that if anything happened to then-Fed chairman Alan Greenspan, his corpse should be propped up and nominated to a new term. But to understand fully the unspoken alliance between President Obama and Chairman Bernanke, and the threat it poses to Republican hopes in the 2012 election, the GOP still has some distance to go.

There is, of course, nothing new about political symbiosis between presidents and Fed chairmen—most definitely including Fed chairmen originally appointed by a president of the other party. Conservatives of a certain age have not forgotten the 1993 sight of Reagan appointee Greenspan sitting in the gallery next to Hillary Clinton at a joint session of Congress, tacitly blessing Bill Clinton’s stiff tax rate increases.